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Let's look at the specific
example of a complex system
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where there is a lot of
uncertainty about its
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behaviour, but
also some patterns.
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This system is the United States
economy before the 2008 crisis.
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More specifically, we look
at the United States housing
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markets, households and banks.
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They are all part of one system,
the United States economy.
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In the 1990's and 2000's,
the United States economy
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had stable growth, low
unemployment and low inflation.
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And it had had this for 10
years, the longest period
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of uninterrupted growth
in its postwar history.
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Most politicians and
academics, therefore,
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regarded the United States
economy as very stable.
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And then in 2008, suddenly
the financial system
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crashed, starting
with the bankruptcy
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of Lehman Brothers,
a large bank.
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And this financial crisis was
followed by an economic crisis,
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and the longest and most
serious postwar recession.
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This is typical of
complex systems.
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Sudden changes and
small beginnings,
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which can have
large consequences.
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So in fact, looking back, the US
economy was not stable at all.
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It was very fragile already
in the growth period.
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The possibility of
crisis was there.
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But apparently, that
was not obvious to most.
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That is, looking back
we know that there
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should have been
large uncertainty
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about the possibility of crisis.
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But the strange thing is,
most economists were not
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uncertain at all.
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They were confident that
there would not be a crisis.
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Now, was there any
way that anyone
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could have anticipated a crisis?
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In a complex and
uncertain world,
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can we make predictions, or at
least can we confidently form
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expectations?
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Yes, we can, if we analyse
the patterns that exist also
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in complex systems.
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They give us a guide to possible
outcomes, even if they do not
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allow us to make
precise predictions.
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Here are the patterns that
characterised the US states'
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economy.
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Its growth was mainly growth
in consumption by households.
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In a sense, it was
strange that households
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could continue to
increase their consumption
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and thereby help
the economy to grow,
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because household incomes in the
United States were not growing.
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On average, they've been flat
for decades, since the 1970's.
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But households were paying
for their consumption
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in another way than
from their salaries,
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by borrowing money from banks.
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They took out mortgages on their
houses and spent the money.
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Because house prices were rising
all the time in the 1990's
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and 2000's, until
2006, households
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could increase their
mortgages continually
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and increase their
spending on consumption
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and grow the United
States economy.
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That's it.
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It's not complicated, is it?
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Quite simple.
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There are four steps
in this reasoning.
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Increasing house prices
leads to borrowing
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from banks, which leads
to more consumption,
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and that leads to
more economic growth.
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That was the regularity
in the US economic system
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in the 1990's and 2000's.
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But simple patterns often
have large implications.
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We can now note two
things which are certain.
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The first thing is
that house prices
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will stop increasing
at some point.
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And the second thing is
that when this happens,
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economic growth will go down.
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If you know the numbers,
you could quite simply
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calculate by how much.
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Now the few people in the United
States who did this before 2006
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recognised that this had to
happen and that this would mean
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not just lower growth,
but recession and high
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unemployment,
somewhere before 2010.
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That's how dependent the economy
had become on rising house
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prices and continuing borrowing.
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Now at the time
when they started
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saying this in the late
1990's, almost no one
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took this seriously.
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The US economy was
extremely stable, after all.
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And indeed, it was.
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But it was also
extremely fragile.
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If you saw the
patterns, you could
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see that the fragility was
increasing all the time.
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The possibility of crisis
was increasing all the time.
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If nothing was
done, one thing was
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certain in this
uncertain world, crisis.
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And that's what happens in 2008
and the years that followed.
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No one could have
predicted which
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bank would be the first
to go under or on what
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day that would happen.
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But anyone realising that we
live in a complex and uncertain
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economy could have recognised
the increasing fragility.
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So here we have a case
study of doing science
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in a complex and
uncertain world.
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Identify the patterns, the
causes and the consequences
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in the system.
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And this will then
help you to understand
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if it is a stable system
or an unstable system,
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if fragility is
growing or decreasing.
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Crisis can be understood
and anticipated,
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even if we cannot
precisely predict it.
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